Project 10000’s financing model – does it stack up?

The Victorian ALP has released its transport plan, Project 10000, so named for the 10,000 construction jobs that are supposed to result.

The plan, in short, appears to be largely a return to what the Brumby government had in mind before losing office, though the most expensive project, Melbourne Metro, is dependent on federal funding that is unlikely to emerge from a car-obsessed Coalition government. The plan calls for a raft of level crossing eliminations, widening of the remaining sections of the Tullamarine Freeway, the “Western Distributor” toll road to improve road access to the Port of Melbourne, and increased funding for outer-urban and regional road maintenance. There’s no support for the East-West link. I’m not sure how seriously their opposition can be taken, given that if things happen according to schedule the contracts will be signed by the time of the 2014 election and they’ve already stated that they won’t renege on any such.

As usual, the rail advocates are screaming that signalling is a higher priority than Metro. Cycling advocates have spotted the complete omission of cycling from the document. And by far the most sensible way to use transport infrastructure more efficiently – congestion charging – doesn’t get a look in. It’s something that really needs to be considered for the public transport system as well as the roads.

But, in this post, what I really want to look at is how the infrastructure projects, including the big ones specifically mentioned and the smaller ones, are to be paid for. Aside for the federal funding for the Metro, and the tolls on the Western Distributor, it seems that everything will be paid for out of something called the “Victorian Transport Building Fund (VTBF)”.

Politicians and some voters seem to love dedicated funds for this, that and the other. It’s in large part a wank; governments can and do pull money into and out of such funds all the time. But, in any case, what’s perhaps more important is where the dollars coming in to the VTBF are supposed to come from. Two sources of funding are mentioned.

The second of the sources mentioned actually makes some small amount of financial sense. If level crossings are eliminated, in many cases that means a chunk of rail track has to be placed underground. The land above that newly-built underpass will, in many cases, be a valuable asset that can be sold. The question is of course how much that land is worth; I don’t know, but I’d also observe that the plan doesn’t even attempt to estimate its worth either. But, still, as a method of recovering some of the cost of doing the underpasses it’s not totally crazy.

But the plan to pay for transport infrastructure by leasing the Port of Melbourne – well, it does smell of funny money, just not in the way that state Treasurer Michael O’Brien is claiming.

The Port of Melbourne is currently run by the Port of Melbourne Corporation, a government-owned corporation. The prices it charges, as a monopoly, are regulated by the Essential Services Commission. It pays a CPI-indexed fee – $75 million in 2012 – to the government. On top of that, however, the Corporation makes a tidy profit each year – around $60 million, some of which has been retained, and some of which is returned to the government as a dividend. The commercial aspects of the PoMC are run to maximise profit within its regulatory constraints.

Given the constraints it operates under – which can’t change significantly whoever operates the port – and the fact that it is already run along commercial lines, it is not at all clear to me why it would make financial sense for the government to sell or lease the port. The government’s gross debt might fall, but it would lose an income-producing asset, and the financial position would stay the same. The only reason a sale would make sense is if the port is being run inefficiently.

It’s not quite as crazy as the insane plan to privatize HECS debt, which would be a gift to the private sector courtesy of the Abbott government, because there may be some scope for a commercial buyer to run the port more cheaply. But, even so, it’s hard to see the difference substantial enough to pay for a large crossing elimination program.

If governments want to pay for infrastructure, there’s no shortage of people willing to lend them money at cheap rates. Can we stop playing accounting games and pay for that infrastructure the cheapest way possible – borrow the damn money, and if necessary raise taxes to pay off said borrowings?

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